Reynolds American Inc., the cigarette maker behind Camel, has made a deal to buy Lorillard Inc., the maker of Newport cigarettes. Together, they will form the second- largest tobacco company in the United States and become a formidable opponent to Altria, the maker of Marlboro.

The purchase was made for $25 billion. It will create not only the number two company, but a major manufacturer of menthol cigarettes. Menthols are gaining traction in the cigarette market, becoming a larger portion of dwindling overall sales.

U.K.'s Imperial Tobacco is also purchasing some of the other Lorillard brands, including Kool and Winston. As part of the deal, Reynolds will sell off Lorillard's Blu e-cigarette brand to Imperial as well, making them a major seller of e-cigarettes in the U.S.

The deal is valued at $27 billion, including debt, and the company is projected to have more than $11 billion in revenue after the deal. For Lorillard shareholders, they will receive $50.50 in cash for each share and 0.2909 of a share in Reynolds stock at closing. This puts the combined value at $68.88 per share.

While the sale is set to close in the first six months of 2015, it will face regulatory investigation. The selling of the Blu brand to Imperial is being done, in part, to soothe regulatory scrutiny. This will offer Imperial a larger share of the American cigarette market, avoiding monopolization and collusion concerns. Altogether, Reynolds will hold 34 percent of the U.S. cigarette market after the deal is done.

"Cigarette volume in this country has been declining for a very, very long time, but ... it's important as we see consolidation and growth in market share, to have a true portfolio of iconic brands," said Reynolds CEO Susan Cameron.

Altria Group Inc, which owns Philip Morris USA, and has over half of the U.S. cigarette market, has not yet commented on the deal, but they have reason to be concerned. This major new competitor will have both parties scrambling for a larger portion of a shrinking market. Additionally, the menthol market is being scrutinized more closely by regulatory authorities, and therefore it may be more difficult to grow than previously expected.

After the merger is completed next year, we can expect to see Joe Camel and the Marlboro Man duke it out more fiercely than ever.